A handful of times recently, prospective real estate investors have asked me about the depreciation deductions they can expect if they successfully setup a short-term rental.
The phrasing often goes like this: Okay, Steve, so assume my rental income covers my expenses including the mortgage interest. A breakeven situation, in other words. I’m also going to get depreciation deductions on the property. And if that happens, how big are those deductions going to be?
The calculator below makes this estimate based on real-life guesses about how the cost segregation engineer breaks out the costs. Just enter your own numbers and click Calculate:
First Year Depreciation: $0.00
Second Year Depreciation: $0.00
Third Year Depreciation: $0.00
Fourth Year Depreciation: $0.00
Fifth Year Depreciation: $0.00
Sixth Year Depreciation: $0.00
Seventh Year Depreciation: $0.00
Tips for Using the Short-term-rental Depreciation Deduction Calculator
The initial default inputs reflect a cost segregation for a $1,000,000 residential property the engineer “segregates” as 30 percent five year property, 10 percent fifteen-year property, and 60 percent residential property. These percentages are just guesses–though also actual percentages we’ve seen in real-life studies.
Cost segregation engineers may alternatively assume a short-term-rental is not residental property but rather nonresidential. So, like a hotel. In that situation, you might use a different set of inputs. For example, .15 for the five-year property, .3 for the fifteen year property, and .55 for the nonresidential property. These would also be examples of real numbers we’ve seen on real studies.
Note: The actual percentage allocations depend on the property. Thus, use my examples for seeing how this works. Not for preparing an actual tax return.
The bonus depreciation percentage equaled .6, or 60% for 2024. In 2025, the percentage dropped to .4, or 40%. for property placed into service after December 31, 2024 but before January 19, 2025. Then, the Big Beautiful Tax Bill bumped the percentage to 100% permanently for property placed into service on or after January 19, 2025.
Some Caveats and Qualifications
The short-term-rental depreciation deduction calculator simplifies some of the calculations. It assumes, for example, you use a mid-year convention for the five year and fifteen year property. That’s often the case. But may be overly optimistic if you buy a property late in a year.
The calculator gives you a half year of depreciation on the real property for the first year. That will be close but probably a little too high or little too low in most cases. Depreciation of real property uses a mid-month convention and so looks the actual month you place a property into sevice. Thus, consider the depreciation numbers slightly rough for that first year. They should be close. But not perfect.
And one final comment: The depreciation deduction calculator assumes the short-term rental property is in the United States. Not outside the county.
Additional Resources
The Vacation Rental Tax Strategy (A primer)
The Section 183 Short-term Rental Problem (How hobby loss rules can goof up your investment.)